Ultima Services Corporation v. U.S. Department of Agriculture et al.

The Center for Individual Rights has filed suit challenging a racial set-aside program for federal government contracts. Section 8(a) allows the Small Business Administration to set aside contracts for companies owned by “socially and economically disadvantaged” individuals. The SBA presumes that companies owned by members of certain racial and ethnic groups qualify as “socially disadvantaged.”

CIR represents Ultima Services, Corp., a company owned by business woman and entrepreneur, Celeste Bennett. Ultima regularly contracts with the Natural Resources Conservation Service, an agency of the U.S. Department of Agriculture. The USDA recently began awarding NRCS administrative support contracts through the 8(a) program. Because Bennett is a white woman, Ultima does not qualify to compete for 8(a) set-asides.

CIR filed suit in the Federal District Court for the Eastern District of Tennessee. It asks the court to enjoin the Small Business Administration and USDA from reserving NRCS administrative service contracts under the 8(a) program, and to declare that Section 8(a)’s presumptions violate the Fifth Amendment.

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IR is representing Ultima Services Corporation, a company that can no longer compete for contracts that make up the core of its business because its owner, Celeste Bennett, is the wrong race.

For more than fifteen years, Ultima has contracted with the Natural Resources Conservation Service (NRCS), a subdivision of the U.S. Department of Agriculture (USDA). The NRCS helps farmers and ranchers to implement conservation practices on their lands. Ultima provides administrative and technical support services for these programs.

Ultima First Contracted with the NRCS Office in South Dakota in 2004

Ultima’s support teams perform a wide range of services for NRCS field, area, and state offices. Services such as assisting with community outreach, technical and administrative tasks, data collection, and other duties related to NRCS Farm Bill Program implementation and ongoing support are performed by Ultima’s employees and are a critical part of ensuring the success of the agency’s operations.

Types of services may vary from state to state as NRCS field offices perform a variety of different tasks depending on their locations. Ultima has worked to ensure that its support teams have a thorough understanding of the unique needs of the various NRCS offices they serve.

By any standard, Ultima has been exceptionally successful. Under Ms. Bennett’s leadership, Ultima fulfilled the NRCS’s demand for highly skilled support teams and did so at a low cost to the agency. As a result, the company achieved an impressive record of repeatedly winning administrative and technical support services contracts in competitive bidding processes. Starting in just one state in 2004, Ultima was soon providing support to the NRCS in states across the country. Until recently, Ultima’s contracts to support these states were regularly renewed.

Despite Ultima’s exemplary work, the USDA has decided to award administrative services contracts under Section 8(a) — a set-aside program that favors members of preferred racial and ethnic groups. Because Ms. Bennett does not belong to a preferred racial group, this decision has prevented Ultima from competing for these administrative services contracts, which make up the core of its business.

Adding insult to injury, the 8(a) companies that take over these contracts will retain the employees that Ultima recruited and trained. So all the hard work, time, and money that Ultima has invested in its contracts are now directly benefiting the 8(a) companies that replace it.

What Section 8(a) Does

Under Section 8(a), the Small Business Administration (SBA) sets aside certain federal government contracts for companies owned by “socially and economically disadvantaged” individuals. The law defines these as individuals who have “been subjected to racial or ethnic prejudice or cultural bias” and have had “diminished capital and credit opportunities as compared to others in the same business area.”

Firms designated 8(a) are insulated from otherwise competitive bidding processes for these set-asides. Sometimes they compete only with other 8(a) firms. Other times an 8(a) firm will be awarded a “sole source” contract and face no competition whatsoever.

In light of the generous benefits that come with being designated an 8(a) firm, applicant companies to the 8(a) program should need to produce strong evidence that their owners are “socially and economically disadvantaged.” In fact, the opposite is true.

The SBA has published a list of preferred racial and ethnic groups. Members of these groups are presumed to be socially disadvantaged individuals, regardless of whether they have ever actually faced racial prejudice or cultural bias. The SBA’s presumptions allow companies to obtain Section 8(a) set-asides for federally-funded contracts simply because they are owned by members of a preferred racial group. Further, millionaires can even qualify for the 8(a), since the SBA has a $4 million threshold on a person’s total assets, excluding qualified retirement accounts. In other words, a business owner with up to $4 million in assets may still be “disadvantaged.”

SBA’s Presumptions Arbitrarily Discriminate Based on Race

Ms. Bennett is a white woman. She is not a member of one of the preferred racial groups, so Ultima cannot compete for 8(a) contracts. Ultima is not just at a “disadvantage”; it is excluded from large sections of the administrative services industry because of Ms. Bennett’s race.

The SBA’s racial presumptions are particularly arbitrary when applied in the administrative services industry. The 8(a) program was touted as a way to address the impact of racial discrimination on a person’s access to capital and credit. But in industries with low startup costs, such as administrative services, diminished access to capital and credit is not a significant barrier to entry.

Beyond that, there is no evidence that the government has engaged in racial discrimination in administrative services. The government’s use of 8(a) contracts should only be allowable in fields in which the government has actually participated, actively or passively, in discrimination. Since the administrative services industry is so new, it is hard to imagine, much less prove, a legacy of discriminatory policies that would require such a remedy.

SBA’s Presumptions Violate the Fifth Amendment

CIR is challenging the SBA’s presumptions regarding the application of the 8(a) program as an illegal form of racial discrimination. The Fifth Amendment to the Constitution prohibits the federal government from passing laws and regulations that classify people on the basis of race, unless they are narrowly tailored to achieve a compelling governmental interest. The 8(a) program’s presumptions should not survive this scrutiny.

Any interest the government could claim to have in rectifying historic discrimination is undermined by a rule that arbitrarily favors people based on race. That is exactly what the 8(a) program does. Using a system of presumptions, the 8(a) program bypasses anything like a meaningful inquiry into the background of 8(a) firms and showers benefits on companies on the basis of race.

Ms. Bennett has built an impressive company; she has more than earned the right to compete for administrative services contracts in a fair process. With the USDA’s decision to award contracts under Section 8(a), Ultima is being denied the right to compete for these contracts because of Ms. Bennett’s race. This is unapologetic racial discrimination, and it can find no justification in the Constitution.